Furnished holiday lets – are they a good investment?

18 June 2018

Increasingly popular

What could be more appealing than owning a property in your favourite seaside resort or rural retreat, which you can use when you want to and rent out for profit for the rest of the year? With claims of much better returns than those offered by residential lettings the interest in furnished holiday lettings (FHLs) is on the rise.

The proportion of holidaymakers who choose self-catering rather than hotels continues to increase year on year so this might be a good time to invest in a holiday home, but it will only be profitable if you work on it like any other business.

A report published by HomeAway, a holiday lettings agency, revealed that total annual revenues from furnished holiday lettings were £950 million and that holiday rental owners earn an average of £12,750 in gross income per unit, with annual expenses of around £6,000.

Location, location, location

Choose your holiday home location wisely and it should show significant capital appreciation. Still more importantly it has to be in a region where the season is long enough to attain 30 weeks’ rental income. A rule of thumb is that the gross income from the 12 weeks of the high season should cover your annual mortgage payments.

Marketing and management

Effective marketing is essential. Prospective customers will want to select your property on the internet, and book and pay on line. Unless you are capable of designing and maintaining your own website you will need to hand over this function to an agency. Typically, these organisations charge 2% or 3% of gross letting income.

Management is also time-consuming. Unless you are prepared to devote your summer and Christmas holidays to cleaning, laundry and maintenance you will need to employ an agency, at a cost of 15% – 25% of gross income.

Remember that people who rent holiday accommodation behave differently from long-term residential tenants. If they are only there for a week they will not be happy if they have to wait a couple of days to get the cooker repaired. As they are not paying directly for power and water some will spend an hour in the shower or leave the heating on unnecessarily. As they have no long-term interest in the property some will abuse your furnishings and equipment.

If you set aside a week or two for your own occupation you will probably spend the time repairing, painting and decorating!

Better tax breaks

In the last three years the Government has made plain its disapproval of landlords of private residential properties. Higher rate tax relief has been withdrawn from mortgage interest, Stamp Duty has been increased on the purchase of “second homes”, and wear and tear allowance has been withdrawn. FHLs have, however, been treated more leniently, though there are still downsides.

The fundamental difference between residential lettings and FHLs is that the former is treated as investment income whereas the latter is regarded as a trading activity. So, these are the main tax advantages:

The income qualifies for tax relief on pension contributions.

Capital allowances – annual investment allowance at 100% is available on the acquisition of fixtures, fittings and equipment.

Mortgage interest relief is available against higher-rate tax.

On disposal, entrepreneur’s relief, reinvestment (rollover) relief and holdover (gift) relief are available against any potential charge to capital gains tax.

It is not all good news on the tax front, however. Investors need to beware of the following:

Stamp Duty Land Tax at the higher rate applicable to second homes applies also to FHLs.

Although treated as a business for most tax purposes, HMRC will not normally grant the 100% Business Property Relief for Inheritance Tax.

Losses on FHLs cannot be set off against other income.

As a business VAT will apply if the turnover limit is exceeded (aggregating all of the investor’s vatable activities).

Also, for a letting to be treated as an FHL, there are a number of conditions, the principal one being that it must be available to the public for at least 210 days per year and actually let for 105 days. There are other important restrictions, so you need to consult us at UHY before you invest.

The recipe for success

Perhaps my most successful FHL client was one that retired with his wife to a farmhouse near a picturesque Northumbrian village. He had a range of disused outhouses which he converted at considerable expense to three holiday lets. He outsourced the marketing but employed villagers to do the cleaning, laundry and gardening, thus supporting the local economy. He personally undertook most of the maintenance. After a couple of years, he became dissatisfied with having his privacy invaded by a new set of strangers each week, so he sold the house and the business for a handsome profit and let us at UHY deal with the capital gains tax situation.

As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax related issues. If you would like to speak to one of our local experts, please contact us.